Wall Street woes: Oh noes, tech titans aren't using bankers

Worstall on Wednesday There was much astonishment over at the New York Times as it explained that the big Silicon Valley tech firms, the Googles, Apples, Facebooks, aren't using the traditional services of the Wall Street bankers as they make their acquisitions.

There are a number of reasons for this. As to whether this is all a good idea or not, some point one way, some another. The balance is hard to measure: except, of course, that the vampire squids are getting less blood out of the economy, which is obviously A Bad Thing.

The article states:

Deals with unadvised buyers are increasing rapidly. The acquiring company did not use an investment bank in 69 per cent of American technology acquisitions worth more than $100m this year, according to Dealogic. That number was 27 per cent 10 years ago.

Let's run through the reasons.

Take the Facebook buy of WhatsApp, for example. There isn't actually a financial case for buying the company in the first place, so asking financiers about whether it's a good idea, or even how to do it, is going to be pretty redundant. The same could be true of Google's buyout of Nest and any number of other such deals. They just don't make sense on the traditional measures of earnings, profits, cash flows or any of the other tools that bankers use to measure matters.

That's not particularly a problem: as long as everyone realises that they are wild (even if well-informed) bets on the technological future, then corporations get to spend their money as they wish (or as their shareholders wish, perhaps). But there's no point in paying out some percentage of the deal to people who are going to use entirely inappropriate measures to work out whether the deal is a good one or not. Thus no banksters need get involved.

It's also true that some of the companies are serial acquirers: Cisco is the poster boy here but others are following the same path. Why pay out to people in wing-tips in New York when you've got enough work going on to hire the same people in sneakers and put them to work on the Coast? And this appears to be exactly what several companies have done: building what amounts to their own in-house investment bank.

Above and below: Wall St? Pah! The sneakers-wearing financial analysts that help today's tech titans with acquisitions are more likely to be found lying on the chaise longue at Google's HQ

We've also got what I take to be the second most important reason. This is that access to Wall Street really isn't about the nuts and bolts of how you organise a deal. Nor is it about how you actually complete one, the paperwork of how you exchange stock certificates and all that malarkey. It's not even about whom you should try to buy nor at what price. The real function of these financial markets is "how in buggery do you finance that, purchase that you want to make"?

Never mind cash – have some stock

And looking at how the deals are currently being financed, we can see that that side, the important side, of Wall Street just isn't needed. Microsoft can splash out $8.5bn in cash for Skype. That might have been a good deal, might have been a bad one, but it could just write the cheque and that's that. No borrowings necessary, no secondary stock issues, so who needs people who know how to finance a deal?

The same is true at Google and others. Even Facebook is using a mix of cash and new stock issued to sellers (rather than floating new stock in the market and then using the cash to buy a company). There's just no need to trouble the public markets, so why hire those gatekeepers of those public markets?

We might wonder a little about how these companies are controlled: Amazon is definitely controlled by Jeff Bezos, Google by Sergey Brinn and Larry Page, Facebook by Mark Zuckerberg, so it's not all that surprising to see them acting like private companies, even though they're publicly listed.

Everyone knows they'll do what they want and the external shareholders are just along for the ride, the very share structures show that to us. But this is also true of those with much more dispersed share ownerships, Apple and Cisco come to mind. They've simply got the cash and stock to be able to finance whatever they want to do without reference to whether the general markets have the appetite to finance their adventures.

But perhaps the most important reason why the Street isn't being used is because said Street has been taking very juicy margins indeed from those tech companies – as the example of Trulia shows:

First, there is the apparent fact that, after hiring Qatalyst three years ago to sell itself to (presumably) Zillow and perhaps one or more other potential buyers, Trulia apparently never terminated the engagement when it failed to lead to a sale. This, as we technically describe it in the trade, was Just Fucking Stupid ... The notion that Trulia could hire Qatalyst to sell itself, have that process fail, and subsequently move on to an initial public offering and other activities for three years without bothering to terminate an open-ended sale contract is just ludicrous.

Then there's the fee that Trulia agreed to pay the bankers, some 2 per cent of so of the value of the potential deal:

Now I understand that the technology world operates in its own reality distortion field, but I have to confess I was stunned by that fee percentage. In the normal business world, where industrial logic and economic pressures operate in place of the moonbeams and unicorn piss of tech land, a billion dollar sale mandate should earn the sell-side advisor flogging it significantly less than one percent of transaction value.

Advisor success fees are heavily negotiated on a deal-by-deal basis, but they normally have some relation to normal fees normally earned by normal advisors normally. This one looks like Trulia’s CEO just hiked up his skirts and asked his Qatalyst banker how far he wanted him to bend over the barrel.

And then Trulia agreed to pay JP Morgan 1.5 per cent when it did finally sell itself to Zillow, which is only four or five times what would be the normal fee on a deal of that now larger size.

All of this for a company that, if sold, was obviously going to be sold to the one and only likely buyer out there, Zillow.

That is, the most important reason that the tech companies aren't using Wall Street is that they don't seem to be very good at using Wall Street. Which we can take two ways really: the first being that the vampires don't get to see so many suckers coming over the hill and hurrah for that. The other is rather more disturbing. Consider this: if they're not very good at using Wall Street, then what unholy deals are they cobbling together without that adult supervision?